FIIs may be permitted to trade in commodities

Mumbai: The union government is planning to formulate policy frame-work for introducing commodity-based schemes for foreign institutions investors, mutual funds, banks and other finical institutions. The Forward Markets Commission, which regulates commodity exchanges in India recently conducted a high level meeting with representatives of commodity exchanges of India.

Under current regulations, commodities are not included in the list of permissible securities to foreign institutions, banks, and other funds for investments. According to Kailash Gupta, managing director, National Multi Commodity Exchange, "Friday's meeting will be crucial as it will formulate guidelines for the participation of FIIs, banks and MFs in the commodities market."

With the entry of foreign institutional investors and banks in commodities trading, the market will acquire more volume and depth. India, with a billion-strong population, is seen as the next developing market, which would see a boom in commodities. With its diversified resource base, India has the potential to develop into a $600-billion commodity market. In agricultural commodities, the current market in physical produce is estimated at $30 billion.

But with a vibrant futures market, it could easily be ten times more (at $300 billion), market observers say. The market for bullion futures alone could easily grow to 20 times the existing $8 billion in physicals. Similarly, the market for futures in edible oil could be ten times the estimated $5.5 billion market in metals.

Globally, funds and large investors keep a portion of their assets in commodities and the exposure works as a diversified risk, though not so in India, where the trend is yet to catch on.

Currently, there are three demutualised commodity exchanges in the country — The National Multi-Commodity Exchange, the Multi-Commodity Exchange of India and the National Commodity & Derivatives Exchange. The total volumes on these three online exchanges are close to Rs 250 crore.

With the volumes of the 20-odd regional exchanges, the combined volume is around Rs 700-800 crores, with the highest turnover (over Rs 300 crore) generated by the Indore-based National Board of Trade, which follows the age-old 'out-cry' system.